Last Updated: 3 June 2022
The US Federal Reserve, labelled by many as the most important central bank in the world, is planning to firmly shrink its balance sheet. Currently, it has $9 trillion (€8.55 trillion) in assets.
Extra pressure on the economy
The Fed wants to reduce this figure to $1.4 trillion (€1.33 trillion) by the end of 2023. With that target, the balance sheet of the central bank of the United States would have to shrink by more than 84 per cent in the next 18 months. That seems a well-nigh impossible exercise. Raising interest rates and tightening the monetary thumbscrews will put extra pressure on the economy. However, according to the Federal Reserve, this is necessary to fight inflationary pressures.
But what does this tight monetary policy mean for the crypto market? After all, Bitcoin has never in its history had a bull market while the Federal Reserve was turning off the money tap. It seems that the market is facing a difficult time, but some analysts think that it will not be so bad.
“Tough Federal Reserve already priced in”
We’ll start with the optimism, which unfortunately for bitcoin and crypto bulls is in the minority when it comes to this topic. According to Nigel Green of deVere Group, a financial advisory firm, the market’s reaction to the Federal Reserve tightening will be minimal as the policy is “already priced in”. Speaking to the Cointelegraph, Green said that the market may see some initial slippage because of the speed at which the Federal Reserve is implementing all of its plans.
“After that, however, we expect a bounce, which means investors will have to adjust their portfolios to take advantage of it,” Green said in conversation with Cointelegraph. Pav Hundal, manager of the Australian crypto exchange Swyftx, believes that bitcoin in particular can benefit compared to altcoins. Mainly because many people see bitcoin as a safe haven in the crypto world.
CryptoWhale expects mega crash
Twitter analyst CryptoWhale is less positive about the short-term prospects of the crypto market. “Bitcoin has never in its history gone through a bull market while the Federal Reserve was putting on the handbrake. Smart whales have dumped their bitcoin on the dumb retail public in recent months. The mega crash is inevitable!”, CryptoWhale said via Twitter.
The Federal Reserve plans to reduce its balance sheet by $47.5 billion (€45.125 billion) per month over the next three months. In September, a reduction of 95 billion dollars (90.25 billion euros) is planned. Ultimately, these reductions should be the prelude to reducing the balance sheet by a total of 7.6 trillion dollars (7.22 trillion euros) by the end of 2023.
Bitcoin has never once in its history been in a bull market while the Federal Reserve did quantitative tightening.
Smart whales spent the last 12+ months dumping their bags on dumb retail.
The mega crash is inevitable!
— CryptoWhale (@CryptoWhale) May 4, 2022
The worst part about this is that I would imagine ~80% of Americans have no idea what QUANTITIVE TIGHTENING is
Why would we, this wasn’t taught in public school
The SEC should worry about educating Americans on these terms as I believe that’s part of “PROTECTING” us https://t.co/Z8RwUNPJwF
— WendyO.eth✨ (@CryptoWendyO) May 31, 2022
Crypto Wendy believes that it is the job of the Securities and Exchange Commission (SEC) to protect investors in this regard as well. According to her, too few people have knowledge of the Federal Reserve’s practices and policies to understand what is going on. When it comes to bitcoin, the SEC always insists on protecting investors and often cites this as a reason to reject a spot bitcoin ETF. Now, according to Crypto Wendy, it is the SEC’s turn to protect investors from their own leaders.